• Having too much of your wealth in an annuity. If the insurance company that holds your annuity goes belly-up, that's the end of the annuity income stream. By investing all or most of your assets in this annuity, you took on high risk because you concentrated your investment in a single company rather than spreading it out, or diversifying it, by putting your eggs in different baskets.
Another common form of risk is overlap risk in mutual funds. All too often, investors put their money into funds that own many of the same stocks or companies of similar sizes, even though the reason many people own several funds is to diversify their investments. By checking fund company websites regularly to see what companies these funds own, you can get a good idea of your risk concentration and see if you need to cash out of some funds and buy others with different holdings.
Many investors also are exposed to considerable risk because they fail to adequately diversify international investments. For example, having too much of your portfolio in emerging markets is a bad idea. But it's far worse to have too much of your emerging-markets money in one country or region; this increases risk exponentially. This error stems from viewing all emerging markets as the same, when they are actually quite different.
Also watch out for the risks posed by an inability to withdraw money from an investment quickly enough. This lack of flexibility may block you from taking advantage of lucrative investment opportunities. Bernie Madoff's clients, unwitting victims of the biggest Ponzi scheme in history, knew they were facing liquidity risk because they could only take money out once per quarter.
While being wary of risks is always a good idea, you can take it too far. Ironically, if you're too risk averse, you run the risk of falling short of your goals investing for retirement. Let's say you're 25 years old and shell-shocked from the market meltdown of 2008, so that instead of stocks, you have all your assets in low-risk, low-return investments like money market funds and Treasury bonds. Chances are you'll miss out on opportunities for significantly higher returns before you hit 65, even if the stock market crashes a few times, because you have 40 years to recover from setbacks.
Regarding actual investment risks, much risk management or prevention comes down to saying, "What if this happens? What if that happens?" Apparently, the right people at J.P. Morgan didn't say this enough — but you can.
Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group http://capstoneinvest.net. He advises individual investors and endowments, and serves as the advisor to CIFG UMA accounts. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at firstname.lastname@example.org.